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#cfa #cfa-level-1 #economics #microeconomics #reading-13-demand-and-supply-analysis-introduction #study-session-4
To continue our example, suppose that the price of gasoline (Px) is $3 per gallon, per household income (I) is $50,000, and the price of the average automobile (Py) is $20,000. Then this function would predict that the per-household weekly demand for gasoline would be 10 gallons: 8.4 − 0.4(3) + 0.06(50) − 0.01(20) = 8.4 − 1.2 + 3 − 0.2 = 10, recalling that income and automobile prices are measured in thousands. Note that the sign on the own-price variable is negative, thus, as the price of gasoline rises, per household weekly consumption would decrease by 0.4 gallons for every dollar increase in gas price. Own-price is used by economists to underscore that the reference is to the price of a good itself and not the price of some other good.
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3.1. The Demand Function and the Demand Curve
e purchased and driven; hence less gasoline will be consumed. As will be discussed later, such a relationship would indicate that gasoline and automobiles have a negative cross-price elasticity of demand and are thus complements. <span>To continue our example, suppose that the price of gasoline (P x ) is $3 per gallon, per household income (I) is $50,000, and the price of the average automobile (P y ) is $20,000. Then this function would predict that the per-household weekly demand for gasoline would be 10 gallons: 8.4 − 0.4(3) + 0.06(50) − 0.01(20) = 8.4 − 1.2 + 3 − 0.2 = 10, recalling that income and automobile prices are measured in thousands. Note that the sign on the own-price variable is negative, thus, as the price of gasoline rises, per household weekly consumption would decrease by 0.4 gallons for every dollar increase in gas price. Own-price is used by economists to underscore that the reference is to the price of a good itself and not the price of some other good. In our example, there are three independent variables in the demand function, and one dependent variable. If any one of the independent variables changes, so does the value


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